Tuesday, May 17, 2005

"Close Your Eyes" And "Buy Some Land"

This story from the Hamptons deserves to be posted if just to document the quotes. George Simpson of Suffolk Research Service said, "Just close your eyes, buy some vacant land anywhere out here, and you can make an almost unbelievable profit.You can't make one-tenth of this kind of return on investment with any other speculation.'"

"Chris Chapin of Prudential in East Hampton, agreed that buyers’ thirst for land appears to be unslakeable. 'When you have people who don’t care what they have to pay for a parcel of land, they just want it, that affects prices."

Realtor Joe Kazickas had this to say. "What percentage of property owners do you know who can afford to buy the houses they live in now? I would guess the answer is about 30%. What’s going to happen in 20 years when the baby boom generation starts dying off? What happens when we are on the backside of that bubble? No one knows. But there won’t be the buyer base then that there is now."

36 Comments:

At 9:29 AM, Anonymous nostradamus said...

(What happens when we are on the backside of that bubble? No one knows. But there won’t be the buyer base then that there is now.")

I think this realtor may have unknowingly stumbled onto something. When this boom ends, whether it's next week or three years from now, we could begin a very, very long decline. Prices have completely diverged from fundamentals and the demographic picture worsens dramatically over the next couple of decades. We could see a Japan-style deflation in real estate that lasts until 2020 or beyond.

In some ways, a long, slow decline wouldn't be that bad. The current speculative mania would be shaken out early in the game and the notion of buying SFH's as speculative investments would seem absurd. Homes will go back to being what they used to be---shelter, not investments.

 
At 9:42 AM, Anonymous Anonymous said...

unslakeable?

Not in Dictionary.com

 
At 9:52 AM, Anonymous Anonymous said...

just close your eyes and buy...

tulip bulbs
south seas land
railroad bonds (1880s)
stocks (1929)
tech/internet stocks (1999)

errr...
LAND!! yeah, that's it! can't go wrong! JUST BUY SOME LAND!

..right
ya just can't go wrong...

 
At 10:50 AM, Anonymous packrat said...

***

Man, I wish there would be a mania for pennies. I got thousands of them in jars. Or broken pens. Got lots of those too. Or worn-out sneakers. Maybe some day my ship will come in.

 
At 11:03 AM, Anonymous Anonymous said...

that first quote reminds me of the E-Trade commercial where the guys were sitting around throwing darts at the stock quotes in the business section of the paper and buying whichever stock the dart landed on.

 
At 11:21 AM, Anonymous Anonymous said...

9:42 Anonymous:

Didn't look it up, but it probably should be spelled unslakable -- derived from the verb slake.

 
At 11:29 AM, Anonymous Anonymous said...

20 years? Not even close. The boomers (if they are driving much of this mania) will be on the buying downhill in 5 to 10 years. Their 'wealth' transfers (to purchase housing) should slow as they try to string out their money through retirement. And the word is for home prices is then regression to the mean...

 
At 11:31 AM, Anonymous Anonymous said...

I know a friend in SW Florida who just sold a piece of land for 4 times more than he paid for a couple of years ago. He paid around $50k and just sold for 200k.
The weird thing is the land is located in a flood zone and is very remote. Who is the schmuck buying that piece of garbage?

 
At 11:47 AM, Anonymous Anonymous said...

"Who is the schmuck buying that piece of garbage?"

A bigger schmuck than your friend (no offense to your friend).

 
At 12:00 PM, Anonymous washbag said...

(A bigger schmuck than your friend --no offense to your friend)

We live in the Bigger Fool economy. Fundamentals mean nothing. Everyone who bought stocks in the late '90s was dependent on a bigger fool to make any money. Now the same thing with real estate. Only today the bigger fool may be an out-of-state speculator or the Bank of China. The Bigger Fool theory goes global.

Wouldn't surprise me to someday see a giant statue of The Bigger Fool right there in Wash DC next to Lincoln and the other important icons of our country's history. We owe The Bigger Fool a great debt of gratitude. The least we can do is build him/her a monument.

 
At 12:05 PM, Anonymous Jim in Venice said...

Hint to Fed: when high school students know it's time for a rate hike, it's time. Get with the program.

WASHINGTON (Reuters) - Federal Reserve officials surrendered the U.S. central bank's famed boardroom on Monday to 20 teenagers who promptly and unanimously raised interest rates to 3.25 percent.

http://news.yahoo.com/s/nm/20050517/od_nm/fed_schools_dc

 
At 12:07 PM, Blogger deb said...

These greater fools have also borrowed 103% of the purchase price on a stated income, IO, ARM.

 
At 12:10 PM, Anonymous nostradamus said...

&&&

Did anyone see the poll at Yahoo Finance! today? Gallup did a recent survey to find out how many Americans were aware of the "housing bubble" discussion.

77% of Americans had not heard that there might be a housing bubble or that anyone was discussing such a thing.

When "housing bubble" was defined for them, 37% agreed that a bubble was "somewhat" or "very" likely to occur in their area within three years.

70% of Americans believed that housing prices will rise over the next year, while only 5% believed they would fall. 23% believed housing prices would rise more than 10%.

Looks like all the ingredients are there for a big fall. Hardly anyone is even aware of the "bubble" argument. To me, if everyone has heard about a bubble but buys anyway, that means they are discounting it. But when folks keep buying and are blissfully unaware of swirling market forces, there could be a rude awakening, particularly given that 70% are convinced of continued gains while nearly no one believes prices could fall.

Recipe for disaster...when sentiment shifts, watch out

 
At 12:15 PM, Anonymous kenpo said...

(when sentiment shifts, watch out)

I read a comment today by an analyst who was making fun of housing "gloom and doomers". His point was that since gloom and doom was now the "consensus" opinion (in his view), there must not be a housing bubble.

But with Gallup now showing that 77% of Americans have never even heard of the "housing bubble", let along believe it to exist, his "consensus" argument is shot down in flames.

This connects with my belief that there is next to no awareness of how risky real estate is right now. Joe6Pack is blissfully unaware, most of the "experts" are talking their own book (realtors, bankers, etc). This is going to get very ugly.

 
At 12:16 PM, Anonymous Anonymous said...

The poll has changed now to ask "What percentage of Americans claim to have heard nothing about a potential housing bubble?" Ha! They must have been surprised at such a high number. After you vote, there's a page that says this, among other things:

"The same poll also revealed that approximately 70% of Americans believe that housing prices will increase over the next year and only 5% believe they will fall. Of those respondents that believe housing prices will continue to rise, 23% believe prices will rise by more than 10%. At the same time, 75% of people believe that mortgage rates will also continue to rise in the coming year."

http://finance.yahoo.com/

 
At 12:19 PM, Blogger deb said...

A poll of recent buyers in LA showed they believed that their houses would apprecitate an average of 22% A YEAR FOR THE NEXT DECADE!!! How's that for delusional.

Prof Piggington (piggington.com) figured out a the rate current income was increasing that would put the median income at $54,535; and the median home price at over $3,000,000 by the year 2015.

No, everyone is very rational here in LA, thinking logically, absolutely no bubble here.

 
At 12:49 PM, Anonymous killerinstinct said...

(that would put the median income at $54,535; and the median home price at over $3,000,000 by the year 2015.)

You got a problem with that? We'll just have to come up with a way to finance it, that's all. No money down, of course. Interest-only. No payments for the first five years. 100-year duration. Neg-am after first five years. Most of the principal amort. would come in final 10 years of 100-year duration with giant balloon payment in final year.

If your grandchildren can't handle the balloon in the final year, they will just refi and get another 100yr duration and start the process all over again.

You gotta think creatively! There's no price we can't figure out how to finance our way out of...

 
At 12:51 PM, Anonymous Anonymous said...

What will the boomers do as they age? Many boomers that i know arent planning on selling their home and checking into a nursing home. They envision themselves living in their current homes until they die.
If a majority of boomers plan on taking the long nap in their own beds, where will the housing supply come from.

 
At 12:53 PM, Anonymous Anonymous said...

How about from the decades worth of supply that's being built right now?

 
At 1:11 PM, Anonymous Anonymous said...

The supply that coming now is simply replacement for the POS post war crap that was thrown up in the 50s. Most of those houses are beyond their expected lifetime. After all, RE as an assest is depreciated across 27.5 years.

 
At 1:13 PM, Blogger The Original Anon said...

"No payments for the first five years. 100-year duration."

You're on the right track. What would really make sense is no payments for the next 45 years, 100-year loan duration. With that kind of loan I would readily take on a $30M loan (so would the janitor, but maybe he won't figure it out). Debt doesn't get transferred to the kids, anyway.

 
At 1:16 PM, Blogger goleta said...

"What will the boomers do as they age? Many boomers that i know arent planning on selling their home and checking into a nursing home. They envision themselves living in their current homes until they die.
If a majority of boomers plan on taking the long nap in their own beds, where will the housing supply come from."



You're assuming they have enough cash or liquid assets to pay for their own medical expenses? They can afford a maid to take care of the big house and a nurse to take of them when they lay on their beds?


The reality is few people die of natural aging and most boomers will die of some medical conditions. It's in our DNA that all medical conditions are like time bomb waiting to happen.
With medical expenses inflate more than 10% a year and most boomers put their fortune in houses, I don't think their have a choice not to sell their homes.

 
At 1:26 PM, Anonymous Anonymous said...

Parents used to live with their kids as they aged. Kids used to live with their folks until they got married. Married couples used to stay married. What boomers want and what they're going to get may well be two different things (like when grandma got checked into the nursing home).

A simple change in fortune could have an awful lot of people reevaluating their living conditions. Most current "demand" isn't need based, but desire based.

Greenspan is a criminal. He's luring poeple into a horrible debt trap. He's cheating savers and borrowers alike.

 
At 1:48 PM, Blogger deb said...

The "demand" for houses is a symptom of the bubble, not a fundamental factor supporting it.

(the same sort of demand that has been seen in tulips, Florida swampland, beanie babies, gold, and Nasdaq stock, among other things)

 
At 1:50 PM, Anonymous Anonymous said...

It's unfair to compare buying land in the Hamptons with mostly any other part of the USA (exclude places like Beverly Hills, etc.) The people there are the least affected by high interest rates, job cuts, etc. They are the power and the elite and just hanging around that sliver of Long Island makes it pretty clear.
As America has moved into a greater divide between the rich and the poor, places like the Hamptons will thrive in their ability to economically segregate those who have and those who will never have no matter how the economy is going.
I do believe that people are closing their eyes and buying property there. There's little risk when the rich keep getting richer in all aspects of life.

 
At 2:01 PM, Anonymous jethrobodine said...

(The "demand" for houses is a symptom of the bubble, not a fundamental factor supporting it.)

Excellent point. I have read story after story where a realtor™ (or other involved party) claims that it can't be a bubble and prices can't go down because of all this demand for housing.

But it is the bubble that is fueling the demand. The quickest way to shut off demand will be for prices to stall or fall. Most people believe just the opposite. But strangely enough, things that people consider "investments" are the only items that get more popular as they get more expensive.

None of these housing bulls question where the demand is coming from. Are thousands of new residents flocking into the area? No. Are thousands of new jobs being created locally? No. Are incomes ramping higher in the area? No.

Demand creates demand. It is based on consumer sentiment. And the financial community is fueling it by creating ever-new ways to indebt yourself. Can't afford $300K? Ok, we'll go interest-only. Still can't afford it? OK, we'll go neg-am. Still can't afford it? Ok, no down payment. Still can't? Ok, 40-year term. Still can't? Ok, we'll get you a grant from a homebuilder. On and on and on...

 
At 2:04 PM, Anonymous Anonymous said...

Most boomers are blissfully unaware that things like a 2-story house will be extremely difficult for them to maintain in their old age. Townhouses will be out of the question.

This is why all of the retirement communities have single-story houses.

 
At 3:58 PM, Anonymous Anonymous said...

Home prices in the US should drop by 50%.

The question is timing...will it take 5 years, or 20 years.

If your 30yo and it takes 20 years, you'll be 50 when you buy your first home!

Sure you want to wait this out?

 
At 4:08 PM, Blogger desi dude said...

what do you suggest?
buy now and sell after 40 years when one is 70? hoping that it would even out by then?

 
At 4:09 PM, Anonymous Anonymous said...

I estimate that it will take about 6 months to for the plunge to begin and about 4 years for prices in hot areas to drop 50%.

Last May, I estimated a 50% chance of a 50% drawdown within 5 years in hot areas. Now I am about 95% certain.

 
At 4:09 PM, Anonymous Anonymous said...

I can foresee a situation where condos continue to appreciate in price, simply because boomers will need to dump their big, unmaintaniable mcmansions for something that's a single story with no yard to take care of.

What's more interesting are the large houses -- what is going to become of them? I mean communities that firms like KB builds; will they become the ghettos of the 21st century?

 
At 4:14 PM, Anonymous Anonymous said...

"Moby Thesaurus II by Grady Ward, 1.0"
41 Moby Thesaurus words for "unslakeable":
a hog for, acquisitive, all-devouring, avaricious, avid,
bottomless, coveting, covetous, devouring, esurient, gluttonous,
gobbling, grabby, grasping, greedy, hoggish, insatiable, insatiate,
limitless, mercenary, miserly, money-hungry, money-mad, omnivorous,
overgreedy, piggish, quenchless, rapacious, ravening, ravenous,
slakeless, sordid, swinish, unappeasable, unappeased, unquenchable,
unsated, unsatisfied, unslaked, venal, voracious

 
At 5:40 PM, Anonymous Anonymous said...

A poll of recent buyers in LA showed they believed that their houses would apprecitate an average of 22% A YEAR FOR THE NEXT DECADE!!! How's that for delusional.
----------------------------------
That's what happens in a state that does not have "early-bird specials."

 
At 5:57 PM, Blogger Thomas said...

As I continue to be surprised that the market keeps creaking upwards ("creaking" is the right word these days; the OC Register came out with figures today showing April '05's appreciation over April '04 as 10% -- a long way down from the 30%+ rates we've been seeing, and wait until the June year-over-years), I have to take stock of my future strategy.

As I've mentioned elsewhere, I think I'm getting a pretty good deal renting an $850,000 house for $2,300. Financing that amount interest-only at 5.5% would get me a completely-unaffordable payment of $3,900, so I'm paying a little more than half in rent what I'd pay to own.

I assume that at some point, rationality will reassert itself in the housing market and the speculators who I suspect make up about half the local buyer pool will all die horrible financial deaths, clearing the way for those of us who just want a place to live. Seeing that OC housing prices have tripled over the last 8 years, I don't think a 50% decrease would be unrealistic; that would still yield an eight-year appreciation of 30%, equal to annual return of over 5% per year -- well over the rate of inflation and over housing's long-term trendline.

The question, as many people have pointed out, is how long it would take to reach the bottom. I don't like the insecurity of renting; I've got young kids who like stability. I can handle my current rental payment comfortably; in fact, I could easily handle paying a couple hundred more. Assuming a 6% interest rate, I could therefore probably afford to owe about $550,000 on a mortgage.

Even if I believe that economic fundamentals suggest that my rented home's price may ultimately decrease by 50% to $425,000, I might well be willing to buy in once the price hits $550,000. The idea of being underwater by $125,000 is panic-inducing, but I don't anticipate moving, and would most likely be in the house long enough to recapture that amount and then some on the yo-yo's way back up.

What do you think?

 
At 6:43 PM, Anonymous Jim in Venice said...

"I don't like the insecurity of renting; I've got young kids who like stability."

Your kids will appreciate your ability to pay for their college educations later. If you get kicked out of the rental, you can always move within the same school district.

(Full Disclosure: I have no children, and probably have no idea what it's like to have them.)

 
At 6:56 PM, Blogger Frank said...

"Even if I believe that economic fundamentals suggest that my rented home's price may ultimately decrease by 50% to $425,000, I might well be willing to buy in once the price hits $550,000. The idea of being underwater by $125,000 is panic-inducing, but I don't anticipate moving, and would most likely be in the house long enough to recapture that amount and then some on the yo-yo's way back up."


I am scared to death at the prospect of having negative equity on a home.

Furthermore, the rate of foreclosures will be historic once panicked sellers realize they can't sell their overpriced home.

 

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